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CoBank Quarterly: Clouds are forming -- Part 2

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Executive Summary

Effects from the pandemic and the Ukraine war continue to reverberate through the global economy. Food and energy prices remain inflated, though prices for underlying commodities have lost upward momentum as economic fears increase. The Federal Reserve is poised to increase rates until it believes inflation has been tamed. Unfortunately the risk of over- or under-doing it is great given that the lag time between action and reaction in monetary policy can be long.

Animal Protein – Steady demand bolsters meat prices

Brian Earnest

Brian Earnest

Brian Earnest

The animal-protein sector faces a number of ongoing challenges but producers transitioned to the first “post-COVID” summer grilling season with blazing success.

Inflation will continue to be the biggest challenge to ongoing strong sales at the retail meat case. Retail meat and poultry prices were 18 percent more in May year-over-year and both spot-market supplies and freezer inventories are at less than pre-pandemic levels. The combination of tight supplies and solid demand kept meat prices 20 percent more than the five-year average for the March-May period.

During the past two years investors have been drawn to both primary and further-processing facilities based on a combination of maxed-out processing capacity, strong consumer demand and healthy profit margins. Yet challenges abound. Participants continue to cite limited labor availability, increased construction costs, new regulatory impediments, animal diseases and increased borrowing costs as some of the new hurdles to expanding production. Now a rapidly slowing economy presents another unknown for producers.

Poultry – Broiler-meat production is expected to be flat to smaller for 2022 compared to a year ago. Despite restrained supply growth, domestic chicken consumption is expected to remain at almost all-time records. Egg-layer productivity appears to be improving, yet the total layer flock is showing moderate contraction. It was smaller by 2 percent year-over-year in the USDA’s most recent Chickens and Eggs report, suggesting the industry is having difficulty maintaining an adequate flock of layers.

Market conditions are conducive to at least moderate broiler-production growth, but expansion has been hindered by access to adequate inputs. That said, the further-processed segment remains an attractive space for incremental expansion, which should keep wholesale breast-meat prices at the top end of the historical range. Broiler operators, especially in the large or jumbo segment, will eventually put their stronger balance sheets toward strategic investments when the time is right.

Both turkey and egg markets have been roiled by supply limitations related to Highly Pathogenic Avian Influenza in the most recent quarter. Egg prices skyrocketed as henhouses were depopulated ahead of Easter. Fresh tom breast meat eclipsed the $6-per-pound threshold, previously considered unattainable. Spot-market prices are expected to remain inflated through the remainder of 2022. Increased prices would normally incentivize a rapid recovery but producers are juggling other considerations such as corporate commitments to cage-free use by 2025 and a longer-term contraction in turkey production.

Beef – Despite some timely rain in portions of the High Plains, much of the densest cattle-producing regions continue to suffer into a second year of brutal drought. Poor grazing and forage conditions as well as inflated hay prices have been especially taxing on cow-calf operators, as have increased input costs across the board. That has resulted in persistently increased cow-slaughter rates. So despite historically strong cattle prices, beef-cow slaughter was 16 percent more year-over-year during May and was 18 percent more than the five-year average.

Beef prices continue to benefit from strong demand both from domestic and foreign markets, even though prices followed the typical seasonal reduction in recent weeks. Total beef slaughter increased 2 percent year-over-year for the first five months of 2022. Exports to key destinations have contributed to market optimism.

• Korea increased 4.6 percent year-over-year through May.

• Japan increased 8 percent year-over-year in May.

• China increased 42 percent year-to-date.

A surge of lean-trim-beef imports has assisted in keeping ground-beef prices in check. After making a strong run to end 2021, fed-cattle prices have largely flattened in recent months. But cost of gain for feedlot operators have increased considerably, further complicating operational efficiencies. We expect that will continue through the fall period. Although packer margins have compressed considerably during the past 12 months, they remain elevated from a historical perspective.

As a result of increased packer margins and depressed cattle prices, interest in expanding capacity is swelling at a time when upstream cattle economics are under severe pressure. During the next 12-18 months, declining cattle supplies are expected to converge with excess capacity, which should contribute to more-favorable conditions for producers.

Pork – Compared to other animal-protein segments, pork-industry dynamics have been fairly uneventful in recent months. Prices for many of the main pork categories – such as hams, butts and loins – have appreciated in line with expectations but the strong rallies witnessed in 2021 have yet to emerge. That said, the wholesale-pork cutout price remains well-supported; it’s averaging 30 percent more than January through June 2021.

In the most recent quarterly Hogs and Pigs report, the USDA estimated June 1 total hog supplies at 72.5 million head, a 1 percent decline from a year ago. Those estimates were largely in line with analyst expectations and the smallest June total since 2018. Of note, the breeding portion of inventory total contracted 0.8 percent versus 2021. Since June 2019 the breeding herd has decreased 2.8 percent.

Mortality rates have increased this year, which producers are attributing to Porcine Reproductive and Respiratory Syndrome, an endemic viral pig disease affecting fertility and rate of gain. The disease is becoming more difficult to eradicate from sow barns through traditional methods – depopulating, sanitizing and repopulating. Between the disease, a declining breeding inventory and inflated feed costs, market-hog supplies should be tight well into 2023.

After several years of successful growth, U.S. pork exports contracted in 2022. U.S. pork exports to all destinations totaled almost 530 million pounds during April, which was a 19 percent decrease year-over-year – but approximately in line with the five-year average for the period.

China’s share has decreased significantly this year, with U.S. exports to the destination decreasing from about 160 million pounds per month in 2021 to only about 40 million pounds per month in 2022.

Specialty Crops – Port logistics ease

Tanner Ehmke

Tanner Ehmke

Tanner Ehmke

Tree nuts – After struggling with sluggish shipping in first-quarter 2022, tree-nut exports spiked this past quarter once port congestion eased and shipping-container rates decreased. Almond, walnut and pistachio exports in April charted a record for the month; the momentum carried into May, according to position reports. Exports to the Middle East and Western Europe were especially strong. Growers are hoping that China contributes to the renewed shipping pace with relaxed Covid-19 restrictions, because consumers stuck at home resulted in a sharp contraction in consumption.

Eased logistical constraints at ports and softened prices of shipping containers helped invigorate the pace of shipping. The cost of a shipping container from the U.S. West Coast to East Asia decreased almost 20 percent from April through June, according to Freightos data. The number of container ships waiting to unload at the Port of Los Angeles also decreased 45 percent, according to the Marine Exchange of Southern California. The anticipated faster shipping pace through third-quarter 2022 is expected to draw down ample tree-nut inventories ahead of the new-crop harvest. Without a faster shipping pace, significant volumes of tree nuts will likely be carried over into the new crop year with warehouse space already tight.

California’s 2022 almond harvest is expected to decrease by 4 percent compared to 2021 despite record-large bearing acreage, according to the USDA’s subjective report in May. Total production is forecast at 2.8 billion pounds, with yields decreasing 8 percent year-over-year to 2,040 pounds per acre – due largely to frost damage to blooms during pollination. The almond industry is concerned about the quality of this year’s harvest due to water shortages as well as cutbacks to weed and insect control by growers as they are squeezed by increasing production costs and depressed nut prices.

Fruits and Vegetables – Fruit and vegetable imports also notched a new record this past quarter when imports seasonally peak, benefiting from loosening of logistical bottlenecks and decreasing freight prices. Refrigerated truck rates decreased from $3.41 per mile in March to $3.03 per mile in June, which was slightly less than year-ago levels according to DAT Freight & Analytics. The hastened import pace comes amid record produce prices following three years of ongoing drought in the western United States. Numerous crops ranging from canning tomatoes to onions, garlic, alfalfa and pima cotton are capturing record prices in the battle for scarce water. As groundwater sustainability plans for critically overdrafted basins come into effect – and as state and federal water restrictions limit allocations amid record drought – increased fallowed acreage is likely to result. With retail prices of fruit and vegetables increasing while growers struggle to maintain production, imports are likely to fill the gap in the months ahead.

Energy – Brace for big summer bills

Teri Viswanath

Teri Viswanath

Teri Viswanath

Increasing fuel prices historically aren’t inflationary but this time it’s different. Increasing electricity bills are also contributing to the squeeze on household budgets this year and may ultimately prove just as sticky as increased gasoline prices. Most consumers have already seen an increase in monthly utility statements but an additional bump appears to be coming as record wholesale prices ultimately filter down into retail rates. Retail electricity prices are generally less volatile than wholesale electricity prices – due to the effects of contracts, rate regulation, etc. – but they ultimately trend in the same direction based on the cost of fuels for generating electricity. Consequently steeply increasing natural gas and coal prices have prompted Energy Information Administration to call for sharply increased summer wholesale electricity prices across the board, with some areas of the country likely to witness a three-fold increase.

In New England power prices are anticipated to increase the fastest, tripling to an average $153 per megawatt hour compared to just $50 per MWh this past summer. The rest of the Northeast region will fare only modestly better, remaining at more than $100 per MWh from June to August. Even the Southeast and Midwest regions of the country, with greater gas to coal fuel-switching capabilities, will not be insulated from increased prices this summer because both fuels remain in tight supply.

This past summer U.S. residential power prices rose at their fastest rate since 2008, increasing 4.3 percent or from $0.132 per kWh in 2020 to $0.138 per kWh in 2021. This summer the average U.S. household will pay $0.144 per kWh, representing another 3.9 percent increase in billing rates. But electricity prices charged by specific distribution companies will vary widely, ranging from an outlier decrease of about 5 percent in the West North Central region to a 16 percent increase in New England. Nevertheless most consumers should brace for a sizeable increase this year, given the longer-term national trend reflecting a steady increase during the past five years.

What’s more, don’t expect the price of electricity to drop anytime soon. Even as fuel prices begin to moderate, the need to upgrade and repair the grid against natural disasters will likely keep residential costs inflated for longer. Unfortunately, increased energy costs have a cascading effect, feeding inflation and hampering economic growth.

Communications – investing continues to increase

Jeff Johnston

Jeff Johnston mug for Agri-View

Jeff Johnston

Investor interest in the data-center market is showing no signs of slowing. DigitalBridge, a global-scale digital infrastructure investor, announced plans to acquire data-center operator Switch for $11 billion. The acquisition price represented a 15 percent premium to the previous day’s close and the deal is valued at about 25 times the company’s earnings before interest, taxes, depreciation and amortization. The announcement comes on the heels of several other colocation data-center deals.

• KKR and GIP’s $15 billion acquisition of CyrusOne

• American Tower’s $10 billion CoreSite acquisition

• Blackstone’s $10 billion QTS acquisition

Despite investors’ insatiable demand for data-center assets, noted short seller Jim Chanos is betting against them, raising hundreds of millions of dollars for a fund that will take short positions in U.S.-listed brick-and-mortar-legacy data-center Real Estate Investment Trusts. Central to his short thesis is a belief that hyperscale cloud providers such as AWS, Google Cloud and Azure are dominating the market driven by a mass migration from colocation data centers to the cloud. And secondly, hyperscalers are going to increasingly build their own data centers, thus becoming less reliant on third-party providers.

We’ve seen this movie before and doubt it has much merit. The reality is enterprises are adopting a hybrid cloud approach – a combination of on premise, colocation and cloud – for a variety of reasons including legal, regulatory, cost, latency requirements, etc. And inflation costs and capacity constraints are actually increasing the demand for third-party data-center capacity. The interconnection capability of third-party data centers makes transporting data much more efficient than building to dozens of separate cloud players’ remote locations.

We see that risk as being overblown and instead side with the approximately $40 billion of private institutional money that has been invested in the colocation data-center market during the past 12 months.

Communications -- 1

Investor interest in the data-center market is showing no signs of slowing.

Visit for more information.

Brian Earnest is lead economist for animal protein in CoBank’s Knowledge Exchange division. He provides market and industry research for the poultry, pork and beef sectors.

Tanner Ehmke is lead economist for dairy and specialty crops in CoBank’s Knowledge Exchange research division, where his focus is on providing market and industry research for the dairy and specialty-crops sectors.

Teri Viswanath is a lead economist in CoBank’s Knowledge Exchange Division, where she focuses on the energy industry, including the electric distribution, generation and transmission sectors as well as the rural water industry.

Jeff Johnston is a lead communications economist in CoBank’s Knowledge Exchange research division, where he focuses on the communications industry. His work revolves around identifying emerging technologies, business models, risks and opportunities within the industry.

CoBank is a $158 billion cooperative bank serving vital industries across rural America. The bank provides loans, leases, export financing and other financial services to agribusinesses and rural power, water and communications providers in all 50 states. It’s a member of the Farm Credit System. Visit for more information.

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